Venture Capital 2024 Comparisons

Notable Venture Capital Financings of the Past 12 Months

In 2023, concerns around high valuations for later-stage start-ups and poor conditions for exits resulted in a significant decline in large-scale venture financings. For Singapore, this was no exception. Notable 2023 deals involving Singapore-headquartered companies included:

• digital credit platform Kredivo’s Series D financing round – USD270 million;
• insurtech start-up bolttech’s Series B financing round – USD246 million;
• cashback rewards platform ShopBack’s Series F financing round – USD204 million;
• semi-conductor manufacturer Silicon Box’s Series B financing round – USD200 million;
• Neobank Aspire’s Series C financing round – USD100 million;
• multi-currency mobile wallet start-up YouTrip’s Series B financing round – USD50 million; and
• telehealth start-up Doctor Anywhere’s Series C1 extension round – USD41 million.

Difficult Fundraising Environment

Challenging macroeconomic and geopolitical conditions, volatile market conditions and several unexpected events (including the collapse of Silicon Valley Bank) had significant ramifications for the fundraising landscape in 2023. Notable trends included:

• a shift in negotiating leverage towards investors, who were able to dictate more stringent governance terms as well as favourable economic and price-protection terms, and to impose greater restrictions on management; and
• complicated structures consisting of tranched closings, blended primary and secondary sales, recapitalisations and valuation adjustments, as start-ups approached the end of their cash runways. 

For further insight into the terms and conditions characteristic of recent venture financings, please see the Singapore Trends and Developments chapter in this guide.

Key Industries for Venture Activity

Financial services and technology (“fintech”) start-ups continued to account for a significant portion of all venture funding in Singapore. Consumer and business lending was a popular sector, led by Kredivo’s USD270 million Series D and Aspire’s USD100 million Series C financing rounds. Funding activity in payment and wealth management start-ups shrank in terms of overall portion of venture capital (VC) investment into fintech start-ups.

Meanwhile, insurance tech start-ups continued to attract investment, led by bolttech’s USD246 million Series B financing round. Healthtech start-ups remained attractive, with telemedicine start-ups Halodoc, Doctor Anywhere and WhiteCoat each raising growth stage rounds. Retail and e-commerce start-ups continued to fundraise, though round sizes were generally smaller across the board (excluding Lazada’s USD1.9 billion investment from Alibaba). 

Traditional exits through public listings and M&A have been rare in Singapore, given the relatively nascent stage of the venture ecosystem. Exits through secondary sales, which were commonly seen in 2021 and 2022, became a rarity in 2023 with the pullback in activity by growth equity investors. While a proven track record of liquidity remains an attractive feature, VCs are continuing to prioritise sectors they view as having the most potential for high growth.

For further insights into recent trends in Singapore’s venture investment and exit transactions, please see the Singapore Trends and Developments chapter in this guide.

Impact of Artificial Intelligence (AI)

AI is making its mark on the way investors evaluate certain businesses, particularly those leveraging generative AI (as opposed to traditional, symbolic AI). Start-ups that embrace AI gain a clear competitive advantage by harnessing the power of data augmentation to innovate more quickly, optimise processes, and deliver superior products and services. These start-ups are able to allocate resources more strategically to uncover patterns and correlations, adapt to changing market dynamics and scale their operations through automation, which frees up monetary and human capital for focusing on other core business activities.

The application of AI by start-ups is driving a new wave of investor interest in fintech, healthtech, biotech, e-commerce and many other sectors.

The assessment of credit risk and default in lending significantly expedites the loan approval process and pricing of premiums in insurance products, and increases the availability of low-cost financial advice through portfolio strategy and diversification solutions in wealth management. This has spawned significant new investment opportunities in fintech beyond the payment and digital banking solutions seen in previous years. 

In healthcare, AI enhances telehealth platforms by enabling virtual consultations, assessment of symptoms and remote monitoring of patients. 

In biotech, machine learning accelerates the analysis of vast datasets to uncover patterns, predict drug efficacy and identify novel therapeutic targets, leading to faster and more cost-effective drug development. 

In e-commerce and other direct-to-consumer channels, AI-driven chatbots are providing personalised customer interactions, around-the-clock support, product recommendations and virtual shopping assistance.

Organisation and Documentation of VC Funds

A common structure for Singapore-managed VC funds is the Cayman Islands limited partnership. Alternatively, such a fund may also be set up as a Singapore limited partnership.  Under both constructs, the main governing document is the limited partnership agreement, with the fund being controlled and managed by the fund’s general partner (GP).

Singapore adopted the variable capital company (VCC) legislation in 2020, and a number of Singapore-managed VC funds have elected to utilise this structure. The VCC is a corporate entity that can be used both for traditional and for alternative investment funds (including mutual funds, hedge funds, private equity funds and VC funds). VCCs allow for the segregation of assets and liabilities between multiple sub-funds or special purpose vehicles, enabling multiple investment strategies or portfolios to be housed within a single umbrella entity while maintaining limited liability. Under the VCC construct, the main governing document is the shareholders’ agreement and constitution.

A mixed structure is also seen where the main pooled investment fund is formed in the Cayman Islands and the Cayman fund establishes a wholly owned VCC in Singapore as a holding company. The Cayman fund then deploys most of its portfolio investments through the VCC, allowing it to benefit from tax treaty advantages associated with the VCC structure.

Economics for Fund Principals

Fund principals participate in the economics of the VC fund through two key methods:

• carried interest – typically 20% of the profits of the fund as a starting point, though this may scale up to 25% or even 30% after the overall return to investors has achieved certain milestones (for example, 25% after a 2x return and 30% after a 3x return); and
• management fees – typically 2% to 2.5% of the total capital commitment during the investment period, and thereafter a step down to 1.5% to 2% of the investment cost of the undisposed investments.

Key Terms Relating to Fund Economics

Notable economic terms for a VC fund that may be subject to negotiation are as follows.

Distribution model

Fund managers with strong bargaining power may negotiate for a deal-by-deal distribution model, where carried interest is calculated with respect to an investment at the time liquidity is realised. This allows fund managers to realise returns earlier. An alternative approach is the return-of-capital model, where carried interest is only calculated after all investments in the portfolio have been liquidated, deferring distributions until the overall fund performance can be ascertained.

Transfer rights

To obtain early liquidity, limited partners (LPs) may negotiate for the right to transfer their partnership interests to third parties prior to the conclusion of the fund cycle.

Investment restrictions

Because of the risks involved in investing in start-ups, investors may negotiate for guardrails around the maximum total commitments of the fund that can be invested into a single portfolio company. This is true especially for early-stage focused funds.

Formation of new funds

To ensure that GPs are committed to the success of their VC fund, LPs may seek to implement restrictions on the GPs’ ability to form any other investment fund with similar objectives and operations until a certain proportion of their fund’s capital commitments have been deployed, or for a fixed period after the closing date of their fund.

Advisory committee

Typically, a Singapore-based VC fund will have an investors’ advisory committee, which will comprise three to five members representing the largest investors. Matters involving conflicts of interest are typically subject to the advisory committee’s approval.

Regulations With Respect to Formation of VC Funds

A VC fund formed in the Cayman Islands is generally required to register as a “private fund” in the Cayman Islands. The Cayman fund may be managed by a fund manager registered in the Cayman Islands or another jurisdiction recognised in the Cayman Islands (Singapore fund managers are recognised). The formation of a VC fund vehicle in Singapore is generally not a regulated activity in Singapore.

Singapore Fund Manager Regulations

Singapore fund management companies with more than SGD250 million of assets under management are required to obtain a licence from the Monetary Authority of Singapore (MAS). Most Singapore-based VC fund managers obtain a venture capital fund manager (VCFM) licence from the MAS, which takes less time to obtain than a full licensed fund management company (LFMC) licence.

A fund managed by a VCFM must invest at least 80% of committed capital in securities that are directly issued by an unlisted business venture which has been incorporated for no more than ten years at the time of the initial investment. In other words, a fund managed by a VCFM may only invest up to 20% of committed capital in other unlisted business ventures (including secondary investments and any investments in digital assets). Therefore, a secondary fund manager or a Web 3.0 fund manager would have to obtain a full LFMC licence in Singapore.

Securities Laws

A VC fund raising capital from investors will need to ensure that it is compliant with relevant securities laws of the jurisdictions of such investors. For example, a VC fund raising capital from US investors is required to comply with US securities laws, typically by qualifying for one or more exemptions from the relevant securities acts.

Notable Trends in VC Funds

In Singapore, Web 3.0 funds are becoming increasingly popular, while impact funds (which are often highly publicised but poorly capitalised) have become less prevalent. Fund-of-funds remain actively involved in investing in VC funds in the region. Singapore government-backed funds such as GIC, Temasek and Pavilion Capital are active LPs in the market. In addition to directly investing into promising start-ups, such funds may also support regional and overseas VC funds as an LP or anchor investor.

Favourable Tax Incentives for Supporting Local Start-Ups

VC funds that focus the deployment of their capital commitments in Singapore-based start-ups may be eligible for Singapore income tax exemptions with relevant approval from certain government agencies, such as Enterprise Singapore (the government agency responsible for promoting enterprise development and supporting the growth of Singapore as a hub for start-ups). A number of other initiatives are undertaken by the Singapore government to promote the VC landscape (see 4.3 Government Endorsement).

Legal Due Diligence in VC Deals

The level of legal due diligence conducted by VC investors in Singapore varies depending on the stage of investment, and on whether the investor is a new investor or a returning investor. At a minimum, investors should review the ownership structure, “tie-out” the capitalisation, and examine material contracts and past acquisitions by the company. Intellectual property and regulatory issues may also be important, depending on the nature of the business.

Ownership

Many start-ups with primary or substantial operations in South-East Asia, India, the Middle East and other regions choose Singapore as their place of incorporation, but book revenues, incur expenses, hire talent, enter into contracts and hold tangible and intangible assets through one or more foreign subsidiaries. Because investors fund and receive their equity interest in the Singapore entity, it is important to confirm that the value of the subsidiaries flows directly back to the parent, with minimal leakage. Most subsidiaries are 100% wholly owned, though in certain countries (such as Indonesia and Vietnam) such entities may enter into a nominee ownership structure with the parent.

Capitalisation

The issued and outstanding shares of Singapore companies are recorded and maintained by the Accounting and Corporate Regulatory Authority of Singapore (ACRA), including the Electronic Register of Members (EROM). Under the Companies Act 1967 of Singapore (the “Companies Act”), certain entries in the EROM are prima facie evidence of their existence, so companies should ensure that their corporate secretary provides up-to-date and accurate lodgements of changes in the company’s share capital.

Although the accuracy of these registers ultimately depends on the underlying information provided by the company to its corporate secretary, investors are generally comfortable with relying on these registers to ascertain the share capital of the company, rather than with undertaking a comprehensive and independent review of the various underlying documents (including director and member resolutions, share transfer forms, share application forms and subscription/transfer agreements).

Investors should note that the number of shares reserved for issuance under a company’s employee share option plan (ESOP) is not typically recorded with ACRA, and must be verified by a review of the relevant resolutions and underlying documents. Understanding the precise number of shares reserved under the ESOP is an important part of due diligence, as it directly impacts on an investor’s stake in the company on a fully diluted ownership basis.

Finally, the requirement to maintain an EROM has only been in effect since 3 January 2016. As such, corporate transactions prior to that date may not be completely reflected in a company’s EROM, and, as noted above, the correctness of the EROM (and all other records maintained on ACRA) is ultimately dependent on the efforts of the corporate secretary.

Material contracts

Depending on the nature and complexity of material contracts, investors may undertake a “red flags” or in-depth review, especially if the valuation of a company relies on a select few material contracts. This is true especially for start-ups in the enterprise software, manufacturing and supply sectors, where several large customer contracts may drive a substantial portion of the company’s overall revenue. Key areas of focus in the review of material third-party contracts include:

• understanding the monetary obligations of the parties, whether in the form of fees, contingencies, royalties or other payments;
• term and termination provisions (including whether either party may terminate for convenience, and if so, whether a substitute counterparty is available on commercially similar terms);
• exclusivity terms with respect to inbound and outbound licensing of technology, anti-competition restrictions and other limitations on the company’s ability to do business in a particular field or region; and
• anti-assignment terms, which could potentially delay a future exit transaction (especially relevant if such transaction is structured as an asset sale rather than as a complete equity sale).

Acquisitions

If the company has engaged in any past acquisitions or business combinations, it is important for an investor to understand what go-forward obligations the company may continue to owe to the sellers, including:

• earn-out arrangements and other retention or similar obligations to sellers’ employees and founders;
• escrow or holdback arrangements that are due to be released in the future, whether in cash or the company’s equity; and
• breaches or potentially indemnifiable losses identified since closing – it is helpful if the company has completed an audit cycle since the closing.

Intellectual property

Due diligence of intellectual property (IP) in the context of a start-up includes ensuring that:

• IP necessary to operate the business is properly owned and enforceable against infringing third parties; and
• the company is not infringing third-party IP.

Ownership due diligence involves ensuring that:

• all service providers who have contributed to IP development are contractually bound to assign inventions created in the scope of their engagement;
• the company has proper policies in place for the protection of codebase and trade secrets;
• the company has validly registered and maintained its registrations for registrable IP, such as copyrights, marks and patents; and
• the company has licensed requisite third-party IP, and has provided licences to use its IP under enforceable and sustainable terms.

Non-infringement due diligence involves:

• confirming general compliance with third-party licences and that there are no pending or threatened claims;
• confirming that the company has reasonable policies in place on the use of open source, if relevant; and
• in a minority of cases and primarily due to cost, confirming that the company has conducted freedom-to-operate analyses in certain fields and markets.

Regulatory matters

Companies operating in a regulated space – such as direct-to-consumer goods, financial services (particularly payments and lending), insurance underwriting, education, healthcare and life sciences, and the development of critical technologies with national security implications – need to ensure that they have the requisite licences in the jurisdictions where they market their products and services. Compliance with local labour and with employment, tax and securities laws are also common focal points of due diligence.

Non-legal Due Diligence

Non-legal due diligence consists primarily of financial due diligence, which is typically undertaken in-house by the VC investor. In recent years, investors into later-stage companies have started engaging forensics firms to examine ownership structures, conduct litigation searches and inspect the personal backgrounds of key personnel. Such qualitative diligence processes have become more important in light of high-profile internal control issues at some venture-backed start-ups, which have exposed directors to fiduciary liability and raised questions from fund LPs.

Timeline for Growth-Stage Financing

The timeline for a financing round in the growth stages is typically 12 to 16 weeks from the signing of a term sheet, and investors typically negotiate for an exclusivity period (during which the company must negotiate in good faith and must not actively solicit competitive term sheets) of 60 to 90 days. In the past two years, as growth funding became less accessible, the commercial due diligence timeline leading up to a term sheet has expanded, with investors sometimes engaging in conversations with start-ups for months before seeking formal investment committee approval. For growth-stage companies with a large investor base, the tension between existing investors reluctant to concede favourable terms to new investors and new investors unwilling to fund without additional protections can result in a protracted negotiation and approval process. 

Involvement of Counsel

Separate counsels are typically engaged by the lead investor and the growth company, and existing investors may also engage their own counsel to review the revised stockholder agreements once these are substantially agreed between the lead investor and the company. Unsurprisingly, timelines and costs almost always directly correlate to the number of parties involved in negotiations.

Consent Thresholds

Shareholder agreements are typically structured to allow for new financings to take place and for requisite amendments to be made without having to obtain the consent of all shareholders. However, the consent of a specified majority of a class or subclass of shares is typically required. In addition, the consent of at least 75% of the outstanding shares (on an as-converted-to-ordinary-shares basis, in the case of preference shares) is required under the Companies Act to amend the constitution of the company (which is a prerequisite for issuing the new class of preference shares). 

The consent of a majority of the outstanding shares (on an as-converted basis) is also required under the Companies Act to issue new shares. Unless certain requirements are met, the authority to issue new shares expires at the conclusion of the next annual general meeting (AGM) or on expiry of the period within which the next AGM is required to be held by law; therefore, companies should be careful to ensure that shares are not issued after authority has expired.

Standard Economic Rights in Early-Stage Financings

A new class of preference shares is typically established in connection with a venture financing. These preference shares feature economic and price-protection terms, including:

• anti-dilution rights (eg, the right of an investor to adjust their fully diluted stake in the company and to protect their ownership percentage in the event of a future “down round”); and
• liquidation preferences (the priority in which investors are paid out in the event of a company’s liquidation, sale or dissolution).

Standard terms in an “up round” typically involve the issuance of preference shares with “broad-based weighted average anti-dilution rights”, which account for the size of a future down round and a “1x” pari passu, non-participating liquidation preference – this gives priority to an investor up to the dollar amount of their principal in the company, on equal seniority with other preference shares outstanding in the company, and without “double dipping” or participating with the remaining proceeds distributable to ordinary shares. 

Contractual Rights

Shareholders’ agreements generally include a number of negotiated contractual rights. These include:

• board and observer rights, which detail who can nominate a member to the company’s board of directors, or an observer in a non-voting capacity;
• information rights, which require the company to provide certain financial reporting and operating metrics to investors on a periodic basis, as well as annual budgets and business plans;
• pre-emption rights (also called pro rata rights), which provide all or a subset of investors with the right to invest in future funding rounds and to maintain their ownership percentage in the company;
• rights of first refusal and tag-along rights over the shares held by other shareholders (typically founders), which serve the dual purpose of allowing investors the first right to purchase shares being sold by founders or, alternatively, to participate in a sale transaction by founders to a third-party buyer;
• drag-along rights, which enable a subset of shareholders to force a minority of shareholders to participate in a trade sale exit; and
• reserved matters at both the board and shareholder level, which detail a list of actions that the company may not take without the approval of a certain group of investor directors and/or preference shareholders.

It is not uncommon to confine certain information rights, pre-emption rights, rights of first refusal and tag-along rights to “major investors” holding a specified percentage of the share capital, and to require a “burn-off” threshold with respect to board and observer rights, where an investor that has been diluted below a certain ownership percentage over time will lose such rights.

Founder Transfer Restrictions, and Good and Bad Leaver Provisions

In addition to subjecting founder shares to rights of first refusal and tag-along rights, investors typically require founders’ existing shares to be re-vested or subject to blanket prohibitions on transfer. Founders may sometimes negotiate for a “liquidity basket”, whereby a fixed amount of their shares in the company at closing may be freely transferable without being subject to lock-up, right of first refusal and/or tag-along. 

Finally, “good” and “bad” leaver scenarios and associated claw-back rights in founder equity are now staple terms in a shareholder agreement. A bad leaver is typically defined as a founder who has been terminated for “cause” or has resigned without “good reason”, and the definitions of “cause” and “good reason” are often heavily negotiated. 

In a bad leaver scenario, the company and, occasionally, other investors may have the right to purchase the vested equity held by a founder at nominal value or a steep discount to the “fair value” of such shares. Fair value of ordinary shares may be assessed by an independent third-party appraiser or be pegged to a percentage of the latest preference share price. In a good leaver scenario, vested equity may not be subject to a right of purchase, or may be subject to such a right only at fair value or at a smaller discount of fair value. Both in good and in bad leaver cases, unvested equity is purchasable by the company at nominal value.

Singapore Forms for Pre-seed and Later-Stage Rounds

Singapore companies raising pre-seed investments typically use convertible notes or simple agreements for future equity (SAFEs) on widely adopted industry forms published by YCombinator. When raising the first (and subsequent) priced equity round(s), the key definitive documents are:

• a share subscription agreement, governing the terms of the subscription of the preference shares being issued;
• a shareholders’ agreement, governing the ongoing rights and obligations between the incoming and existing shareholders and the company; and
• an amended and restated constitution, providing for other corporate governance matters and replicating certain key provisions of the shareholders’ agreement.

If there is any inconsistency between the shareholders’ agreement and the constitution, the terms of the shareholders’ agreement generally prevail.

Relevance of US NVCA Model Forms

The documents published by the US National Venture Capital Association (NVCA) are also occasionally used, with the requisite adaptations for compliance with Singapore law. Even when drafting Singapore-style shareholders’ agreements, NVCA standards remain a useful point of reference both for investors and for companies, due to the developed and sophisticated venture market in the US and the prevalence of US VCs in Singapore.

Please refer to Renewed Emphasis on Structured Rounds and Downside Protections in the Singapore Trends and Developments chapter of this guide for a discussion of the structures and terms used by investors in recent down cycles.

Common Terms in a Down Round

The most important consideration when structuring a down round is first to determine whether it is possible to obtain the requisite consents required by the shareholders’ agreement and constitution (and any other documents), to effect the contemplated down round structure. New investors in a down round may expect anti-dilution protections to be waived by existing investors, so as to not severely penalise founders who often bear the burden of the anti-dilution adjustment. 

An investor in a down round will almost always expect seniority in liquidation preference, dividends and redemption terms. Investors may also negotiate for a multiple on their liquidation preferences, and for participation rights, as well as ratchet anti-dilution protections to “reset” their entry valuation in the event of future down rounds. Significant oversight and governance rights in the form of extensive reserved-matter restrictions may be imposed, as well as transfer restrictions on founder and other investors’ shares to ward against a premature exit. Lastly, investors may also negotiate for favourable terms in a future upside scenario, including super pro rata rights in excess of their post-closing ownership percentage.

Minority Protection Under the Companies Act

The Companies Act provides a number of statutory protections for minority shareholders. Section 74 provides minority shareholders with the ability to apply to cancel a variation or abrogation of their class rights in certain circumstances, and Section 216 provides the ability to apply for relief under the oppression remedy.

Board- and Shareholder-Reserved Matters

Investors exercise influence over governance and operations by stipulating consent requirements for certain actions taken at the board and shareholder level. Board-level oversight is typically required for operational matters, including:

• the incurrence of debt;
• entry into agreements outside the ordinary course;
• deviations from the business plan and budget;
• approval of equity awards for service providers;
• executive compensation; and
• hiring or firing of key personnel. 

Shareholder-level oversight is typically required for matters that directly impact on the value of an investor’s ownership stake and the rights attached to their shares, including:

• amendments to the shareholders’ agreement and to the constitution;
• the amount of equity reserved under the ESOP;
• liquidity events; and
• dilutive issuance of new securities.

Board-level matters typically require the consent of a specified number of investor-nominated directors, whereas shareholder-level matters typically require the consent of investors holding a specified percentage of preference shares.

Ultimately, the enforcement of reserved matters is a matter of contract, and it may not be easy or feasible to unwind actions taken without proper consent. Investors should consider implementing practical measures for mitigating their risks (such as robust banking policies requiring multiple signatories appointed by the board to withdraw or deploy funds exceeding a specified level) to guard against the risk of misappropriation and embezzlement.

Founder Liability

In early-stage financing rounds, founders may be liable, on a joint and several basis, with the company for breaches of representations, warranties and undertakings provided in the subscription agreement. They may also be required to provide an indemnity for such breaches. While this position may be justifiable for an early-stage company with limited assets, founder liability is often omitted in subsequent rounds as the company matures and its recoverable assets increase.

Indemnities

General, and sometimes specific, indemnities are typically included in subscription agreements. Indemnities should be limited, including via a survival period, de minimis thresholds and baskets. Recovery from founders is usually limited to the value of their shares in the company. Early investors should be mindful that draconian indemnity terms with lengthy survival periods will be viewed unfavourably by future investors, who will not want their invested capital to backstop the indemnity rights of prior investors.

Disclosure Schedules

Disclosure schedules play an important role in qualifying the warranties made in the subscription agreement. General data room disclosure, whereby all documents uploaded to the data room on a given date are deemed disclosed, is typically paired with specific disclosures. In such cases, parties usually negotiate for a “fairly disclosed” concept.

Post-closing Covenants

Deficiencies discovered during the diligence and disclosure process may be rectified by way of conditions precedent to closing, or deferred to post-closing covenants. Requiring matters to be resolved on a post-closing basis may be preferable if the matter at hand is not material and if parties are seeking to close quickly, though investors should take care to ensure that post-closing obligations are in fact completed in a timely manner. 

Enforcement for Breach

For reputational and cost reasons, it is exceedingly rare for a VC to bring legal action against a company on the basis of a breach of warranties or covenants. As such, investors should ensure that they thoroughly assess the reputation and capabilities of founding teams as well as internal controls and governance of the company prior to closing.

Government Programmes

The Singapore government provides a number of grants for supporting local founders and start-ups. These include:

• the Start-up SG Founder Grant, which covers a wide scope of business ideas;
• the Start-up SG Tech Grant, which focuses on new or early-stage start-ups; and
• the Enterprise Development Grant, which focuses on growth and technology adoption. 

Such grants are typically only available to Singapore-incorporated entities, and require minimum Singapore citizen/permanent resident ownership.

Seeds Capital, the investment arm of Enterprise Singapore, incentivises equity financings in Singapore-based start-ups by providing co-investments alongside a list of approved VC funds. Deep tech companies are eligible for higher co-investment.

Tax Treatment of Start-up Equity

There is no capital gains tax regime in Singapore, but, at the point of sale or transfer, stamp duty is payable to the Inland Revenue Authority of Singapore (IRAS) at the higher of 0.2% of:

• the consideration received for the sale of such shares; or
• the net asset value (NAV) of the relevant shares.

The IRAS prescribes guidelines on the calculations of NAV of shares for the purposes of stamp duty. Generally, dividends distributed by Singapore private limited companies to their investors are not taxable.

See 4.1 Subsidy Programmes.

Government Initiatives

There are a number of Singapore government initiatives that promote the venture ecosystem across all stages, including the following.

Availability of government funding

Institutions such as SGInnovate (a private organisation wholly owned by the government) and EDBI (the corporate VC arm of the Singapore Economic Development Board (EDB)) have funds available for supporting Singapore-based start-ups and start-ups with a Singapore nexus.

Human capital development

SGInnovate focuses on developing human capital in the Singapore deep tech ecosystem, by conducting talent programmes and facilitating the sourcing and hiring of deep tech talent through a “Deep Tech Central” platform.

Also, the Ministry of Trade and Industry established the Action Community for Entrepreneurship, which is committed to helping local start-ups fine-tune their business proposals and participate in a suite of incubator and mentorship programmes.

Relocating to Singapore

In 2023, the EDB launched the Global Investor Programme (GIP), which accords Singapore permanent resident status to eligible global investors that are seeking to relocate and drive their investments from Singapore. Investors may qualify under the GIP by investing SGD25 million in a “GIP-select” fund. To qualify, a minimum proportion of the fund must be invested into Singapore-based companies.

Programmes for Facilitating Expansion

Enterprise Singapore is spearheading the Global Innovation Alliance (GIA) comprised of Singapore and overseas partners in the technology and innovation space. As part of the GIA, start-ups are able to access:

• acceleration programmes for facilitating entry into overseas markets; and
• co-innovation programmes for collaborating on research and development with foreign partners.

Exit on Singapore Exchange (SGX)

Later-stage start-ups seeking exits may find support from SGX’s Strategic Partnership Model, whereby SGX, Singapore’s national bourse, charts a bespoke framework for companies moving towards an IPO on SGX. This includes leveraging SGX’s extensive network of investors to:

• supplement and strengthen a company’s existing shareholder base;
• provide support during the IPO process; and
• drive growth post-IPO.

Incentivising Founders and Key Employees

Founder equity is issued at the inception of the business, and investors generally expect such equity to be earned out over a period of years through time-based vesting. Other key employees are granted options when they commence their services to the company, also subject to time-based vesting. After the company has raised funding, options are typically granted in lieu of shares since, under the tax laws of most countries, the appreciation in value of options becomes taxable only at exercise, whereas the increase in value of shares is taxable as the shares vest.

At the time of a financing, re-vesting of all or a portion of vested equity may be required. The amount to be re-vested and the duration of re-vesting are terms typically negotiated in a term sheet. Founders and key employees may also negotiate for:

• “single trigger” acceleration, where all or a portion of unvested equity accelerates and becomes vested upon a liquidity event; or
• “double trigger” acceleration, where unvested equity accelerates if a founder/key employee is terminated shortly before or within a period following a liquidity event.

In some cases, founders/key employees may negotiate for a partial single trigger or double trigger for a portion of their unvested equity. Acceleration features are meant to incentivise employees to work towards a successful exit event, with the assurance that they will not be denied an opportunity to earn out or realise value on unvested equity.

As equity is diluted over time, founders and key employees may be further rewarded with refresh options. Such options may be subject to milestone and KPI vesting terms or to non-traditional time-based vesting schedules. 

Investors also typically negotiate for restrictions on founders’ shares. Please see under Founder Transfer Restrictions, and Good and Bad Leaver Provisions in 3.3 Investment Structure for an in-depth discussion of these terms.

Share Options

Options are the most common form of equity awards for start-up employees, and form an important part of an employee’s compensation package. Most grants are subject to a four-year vesting schedule with a one year “cliff”, whereby 25% of the options vest on the one-year anniversary of the employee’s employment with the company, and the remaining options vest monthly or quarterly in equal instalments thereafter. 

Vested options may be exercised for shares. Companies typically require employees who have left the company to exercise options within a 60- to 90-day timeframe, failing which, options lapse and are deemed forfeited. The intention is to ensure that departed employees who are no longer contributing to the start-up do not have the ability to retain their options and to benefit from the efforts of others.

Strike Price

To exercise an option, the holder may need to pay an exercise price or strike price set at the time of the option grant. Employees subject to US tax may only receive options with a strike price at or above fair value, but Singapore and most other countries do not have specific requirements relating to the setting of the strike price. Setting the strike price at nil or nominal value is not uncommon in Singapore and is highly beneficial for option holders. However, having a meaningful strike price (even if at a discount to fair value) rewards earlier employees and may better align the incentives of later employees. 

Acceleration

In contrast to founders and key management, acceleration of vesting for rank-and-file employees is not a common feature. Investors view acceleration terms as being dilutive to their interests at the time of exit, and a potential acquirer will also factor such terms into their ability to retain such employees after an acquisition. If employees are significantly or fully accelerated on their unvested equity, an acquirer may need to offer additional equity off their own cap table to such persons as part of their retention package. 

ESOP Tax Considerations

Unlike many countries, Singapore does not have a capital gains tax regime. However, individuals who are granted options will be taxed on any gains or profits arising from their participation in an incentive pool as part of their income tax, and Singapore applies a progressive tax rate for individuals. 

Tax is assessed at the point of exercise of options, and is calculated on the spread between the fair value at exercise and the strike price paid. If shares are subject to a selling restriction/moratorium period, the gains are calculated as of the date such restrictions are lifted. Subject to certain criteria, an option holder may apply to have their payment of tax on exercised options deferred for up to five years, but interest must be paid on such a deferral. 

Foreign employees who terminate their employment in Singapore are subject to the “deemed exercise” rule, whereby taxable gains from unexercised options (as well as exercised but restricted options) become immediately due. Such gains are deemed as income derived on the later of one month before the cessation of employment or the date of grant. Under the alternative “tracking option”, employers that satisfy certain criteria with approval from the IRAS may bear the responsibility of:

• keeping track of unexercised options;
• computing and reporting gains from specified income-realisation events; and
• collecting and paying taxes on such gains. 

ESOP Considerations in a Financing Round

Start-ups that have raised a priced equity round usually adopt an ESOP prior to or concurrent with the closing. In later rounds, investors will typically require an ESOP top-up in connection with the new raise. Existing shareholders and new investors will expect clarity regarding who bears the burden of the top-up dilution. An ESOP increase associated with a financing will be dilutive to either:

• the existing shareholders only (in which case it is counted entirely against the pre-money, fully diluted capitalisation); or
• both the existing shareholders and the new shares issued in connection with the new round (in which case some or all of the increased amount is counted against the post-money, fully diluted capitalisation). 

When it comes to valuation and dilution, investors participating in a round will be clear about how many dollars they are investing, and what those dollars translate to in terms of their post-closing, fully diluted ownership percentage for the foreseeable future. From the investors’ perspective, counting the ESOP increase against the post-money is tantamount to a valuation adjustment, as they will be immediately diluted by such increase after closing; thus, for simplicity, the ESOP increase is almost always counted against the pre-money capitalisation and is non-dilutive to newly issued shares.

Amount of Option Pool Reserves

Determining the appropriate quantum of an ESOP increase is ultimately a commercial decision, but a common benchmark is to increase the ESOP by an amount needed to assure new round investors that the company will have sufficient hiring runway for the next six to 12 months, after which such investors will be expected to share in the dilution of any additional ESOP top-ups.

In earlier rounds, start-ups may be expected to allocate a greater percentage towards the available and unissued ESOP, as such start-ups generally cannot offer lucrative cash compensation packages to employees and rely heavily on equity compensation to subsidise, resulting in accelerated depletion of the available ESOP. If a start-up has promised, but has not yet formally issued, a certain amount of shares out of its ESOP, it will typically be expected to account for such promised equity as issued and outstanding for purposes of determining the unallocated and available ESOP.

Exit Rights

Common exit-related provisions include:

• registration rights in connection with a public offering or follow-on offering;
• tag-along rights;
• drag-along rights;
• redemption rights; and
• undertakings to use “reasonable” or “best” efforts to enable an investor exit within an agreed period of time.

Registration rights provide certain investors with the right to force a company to undertake a registration process with the relevant securities regulators, to register their shares for sale to the public.

Tag-along rights allow investors to co-sell a proportion of their shares alongside sales by founders and, potentially, other shareholders. In Singapore, it is common for investors to negotiate for a “change of control” tag-along, whereby they are entitled to sell their entire stake in the company should a sale by founders or other shareholders result in a change of control of the company’s voting power. The intention is to ensure that investors who invested in a start-up governed by collective control among minority shareholders should not be “stranded” if the start-up becomes majority owned and controlled by a single shareholder through a buyout.

Drag-along rights empower the board and shareholders to compel the sale of all or a significant majority of the company’s share capital to a third party. Investors may occasionally seek the ability to unilaterally initiate a drag sale after a set number of years. However, enforcing this provision can be challenging in practice, as it is unlikely a company will execute a successful sale process without the support of management and/or other major investors.

Redemption or buyback rights provide an investor with the right to put their shares to the company after a period of years. The enforceability of such provisions is highly dependent on the company’s solvency and other statutory limitations. Such rights are uncommon, and early-stage investors seeking such rights should be mindful that later investors will almost always negotiate for similar rights on par with, or senior to, their rights of redemption, which may have a counterproductive effect.

Investors commonly negotiate for the company to use reasonable or best efforts to facilitate an exit (whether through a trade sale or secondary sale) within a period of years. It remains to be seen whether and how such rights will be enforced in practice. The general consensus is that such efforts are limited to entertaining exit opportunities in good faith and providing support in the due diligence of the company’s business by an interested third-party buyer, but stop short of devoting substantial company resources or hiring a financial adviser to run a sale process. However, investors may sometimes specifically require that the company hire a financial adviser at the company’s expense to run a formal sale process upon the expiry of the exit term.

Exit Triggers

Events that trigger exits typically include:

• any sale of shares that results in a change of control of the company;
• asset sales where the company disposes of all or a substantial amount of its undertakings and assets; and
• IPOs.

Investors may require that, if the company exits via an IPO, the IPO must satisfy certain criteria (a “qualified IPO”). Common requirements include:

• that the public offering be firmly underwritten and launched on a reputable securities exchange with meaningful trading liquidity;
• that the gross cash proceeds from the IPO exceed an agreed dollar amount; and
• that the IPO be priced at a certain valuation or implied market capitalisation.

Public Offerings

IPO exits for start-ups in Singapore have been few and far between, particularly on established global exchanges such as the NASDAQ, NYSE and HKSE. Considerations that drive the timeline for an IPO include (but are not limited to):

• the profitability, credit-worthiness and maturity of the company;
• market conditions;
• retail investors’ awareness of the company; and
• the company’s growth potential. 

For further insights into Singapore’s exit landscape for start-ups, please see the Singapore Trends and Developments chapter in this guide.

Restrictions on Secondary Sales

Most companies do not place significant restrictions on the transfer of shares by investors, as such investors generally expect their equity in the company to be freely transferable. However, it is not uncommon for certain companies to disallow transfer of shares by investors to their direct competitors. In such cases, companies and investors may agree to a narrow definition of “competitor” which may include a specified list, updated on a periodic basis. 

Employee Liquidity

To facilitate employee liquidity, companies occasionally implement employee liquidity programmes. Such programmes may be structured in various ways, the most common being a company buyback programme funded by a third-party investor as part of a new financing round. In such cases, the company allocates a portion of the new funding round proceeds to buy back shares from employees who wish to sell. 

Alternatively, companies may facilitate the sale of employee shares through a third-party-sponsored tender offer. Under such arrangements, eligible employees are offered the opportunity to sell their shares in the tender offer, subject to limitations placed by the company on the number of shares tendered by such employees. The company then selects certain buyers to submit a tender offer, and serves as the transfer agent for such shares. 

Singapore Companies

The Singapore Securities and Futures Act 2001 (SFA) provides that all offers of securities by a Singapore company are subject to prospectus requirements, unless such offer falls within a list of exemptions. Common exemptions include the following.

Institutional and accredited investors

Subject to conditions set out in Sections 274 and 275 of the SFA, offers of securities to “institutional investors” and “accredited investors” (as defined in the SFA) will be exempt from prospectus requirements. As an anti-avoidance mechanism to prevent the circumvention of prospectus requirements, shares allotted and issued under such exemptions are not permitted to be sold (save to other persons specified in Sections 274 and 275 of the SFA) within the first six months of such shares being acquired.

Private placements

Subject to conditions set out in Section 272B of the SFA, offers of securities to no more than 50 offerees within a 12-month period will be exempt from prospectus requirements. The 50-person limit is based on investors that are offered securities, and not on the number who ultimately invest.

Small offers

Subject to conditions set out in Section 272A of the SFA, “personal” offers of securities of up to SGD5 million within a 12-month period will be exempt from prospectus requirements. “Personal” offers may only be accepted by the offeree in question and can only be made to persons that are likely to be interested in the offer based on past contact or connections.

ESOPs

Section 273(1)(i) and (4) of the SFA provide that offers of securities under employee share schemes to “qualifying persons” will be exempt from prospectus requirements. These “qualifying persons” are directors, employees (including former employees), consultants, advisers, and, in the case of directors and employees, their immediate family members.

In addition to complying with the SFA, Singapore-based start-ups should be mindful of compliance with the securities laws of the jurisdictions in which their prospective investors reside.

Foreign Direct Investment Considerations

Singapore is generally regarded as a friendly jurisdiction for foreign direct investment, but, like many countries, foreign investments are subject to strict anti-bribery, anti-money laundering and counter-terrorism financing regulations. Further, in a subset of regulated sectors (such as financial services, media, telecommunications and utilities), foreign investment may require regulatory approval and may, in some cases, be subject to foreign ownership limitations.

To further protect national security interests, Singapore recently passed the Significant Investments Review Bill (in January 2024), whereby investors in designated entities identified as critical to Singapore’s national security interests will be required to:

• obtain approvals from the Minister for Trade and Industry (MTI) before acquiring “controller” stakes in such entities; and
• notify the MTI upon becoming a 5% controller of such entities. 

While the list of designated entities has yet to be released and will be subject to change from time to time, the list is expected to be narrowly tailored and unlikely to affect most VC investments.